Safe Harbor Rules for PPP Loan Forgiveness

A standout feature of the Paycheck Protection Program is that 100% of the loan can be forgiven if you meet the loan forgiveness criteria. But meeting all of the criteria can be tricky, especially when you have employees.

To help ensure that everyone who should be granted forgiveness has access to it, the SBA has released information on a number of safe harbor rules.

What is a safe harbor?

A safe harbor is a provision that can be included in rules and laws to ensure that people don’t accidentally violate rules because of a technicality or situation that is outside of their control.

The safe harbors related to PPP loan forgiveness help businesses qualify for forgiveness, even if they don’t meet all of the criteria.

With an updated PPP forgiveness application released on January 19, 2021 came updates to safe harbors for PPP loans disbursed in 2021.

Good Faith Certification Safe Harbor

The first safe harbor for the PPP program was related to the requirement that borrowers certify on the loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

To address applicants’ concerns about this certification, the SBA and the Treasury approached this in two ways:

  1. They allowed borrowers to return their PPP funds by May 14, 2020 without repercussions, and

  2. Businesses that borrowed less than $2 million are automatically deemed to have made the required certification in good faith

So if you borrowed less than $2 million, the SBA isn’t going to review documentation to support that the loan was necessary to support your business. Of course, the SBA can still evaluate your loan on other aspects, such as if you were eligible for the program.

FTE Reduction Safe Harbor

A goal of the PPP loan is to have you keep employees on payroll, rather than furlough or lay them off. So if your business does have a reduction in full-time equivalent employees (FTEs), your PPP loan forgiveness amount may be reduced.

Figuring out whether your business has reduced FTEs is done by comparing a chosen reference period to the Covered Period (or Alternative Covered Period) — the amount of time you have to spend the loan amount. Depending on when you applied for the PPP loan, you can choose to have your Covered Period or Alternative Covered Period span either eight weeks after your loan disbursement or 24 weeks after your loan disbursement.

On the application, you choose the reference period you’d like to use to calculate your FTEs. The reference periods you can choose from are:

  1. February 15, 2019 to June 30, 2019

  2. January 1, 2020 to February 29, 2020

  3. A consecutive twelve-week period between May 1, 2019 and September 15, 2019 (for seasonal employers)

You can choose whichever period works best in your favor. When you compare your reference period to your Covered Period, if there was a decrease during your Covered Period of FTEs, your loan forgiveness amount will be reduced.

If you find yourself in that position, there are two safe harbors and an exemption that you may be able to use to avoid having your loan forgiveness amount reduced.

FTE Reduction Safe Harbor 1

If your business doors were required to be fully or partially shut, a safe harbor applies.

Businesses that weren’t able to operate at the same level between February 15, 2020, and the end of the Covered Period because of compliance with guidelines issued between March 1 and December 31 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, qualify for the safe harbor. For loans disbursed after December 27, 2020, the period is extended to the end of your 8 to 24 week covered period.

Applying this safe harbor to your application is simple — you’re required to check a box certifying that it’s true. But you’ll want to keep documents that help support this. However, the instructions don’t clarify what this documentation would look like so use your best judgment to keep any paperwork that applies here.

FTE Reduction Safe Harbor 2

You might be trying to restore your FTEs but it’s taking longer than expected. This safe harbor exempts borrowers from forgiveness reduction if they meet two criteria:

(1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and

(2) the Borrower then restored its FTE employee levels by not later than December 31, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020. For loans disbursed after December 27, 2020, this is extended to the end of your 8 to 24 week covered period.

So if before the end of your covered period you’re able to bring your FTEs back up to where they were on February 15, 2020, you can qualify for this safe harbor.

You’ll calculate this safe harbor by using the PPP Schedule A Worksheet. After you fill out the worksheet determining whether you qualify for the safe harbor, you’re not required to submit any additional supporting documentation. But the application does specify that you’ll need to keep any supporting documentation that you use to fill out the worksheet.

FTE Reduction Exception

This isn’t a safe harbor but it is an exception available to businesses who experienced an FTE reduction. There are certain situations where you can exclude an employee from the FTE calculation.

These situations include:

  1. If you made a good-faith, written offer to rehire an employee who was employed on February 15, 2020, and you weren’t able to hire a similarly qualified employee before December 31, 2020 (for a PPP loan made after December 27, 2020, before the last day of the 8 to 24 week covered period)

  2. If you made a good-faith, written offer to restore reduced hours of an employee during the Covered Period or the Alternative Payroll Covered Period and they rejected it

  3. If during the Covered Period or Alternative Covered Period you fired an employee for cause, the employee voluntarily resigned, or voluntarily requested and received a reduction of hours

Broadly speaking, if you’re trying to restore your headcount and despite your best efforts you can’t, there’s a chance that your reduction in headcount won’t impact your loan forgiveness.

You’re not required to submit documentation with your loan forgiveness application but you will need to keep supporting evidence. This includes job offer and refusal documentation, written requests for an employee to reduce hours, voluntary resignations, supporting documentation for firing an employee for cause, and anything that shows your inability to hire qualified employees for unfilled positions.

Salary/Hourly Wage Reduction Safe Harbor

Another reason that PPP loan forgiveness may be reduced is if the salary or hourly wages paid to employees who earn less than $100,000 annually was reduced by more than 25% during the Covered Period (or the Alternative Payroll Covered Period).

But if you had to reduce salaries or hourly wages, there is still a chance you won’t have your loan forgiveness reduced if you meet the safe harbor requirements.

There are two tests included in the PPP loan forgiveness application to determine whether you qualify for the salary/hourly wage reduction safe harbor.

  1. If the average annual wage or salary paid between February 15, 2020 and April 26, 2020 is equal to or more than their average annual wage or salary as of February 15, 2020, the safe harbor applies.

  2. If the average annual wage or salary as of December 31, 2020 is equal to or more than the annual wage or salary as of February 15, 2020, the safe harbor applies. For a PPP loan made after December 27, 2020, they will use the last day of your 8 to 24 week covered period.

Like with the other calculations, any supporting documentation doesn’t need to be submitted with your application, but it should be retained. While the SBA doesn’t specify exactly what they need as support for claiming this safe harbor, good record keeping will be critical.

More PPP Resources:


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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